How Decentralization Plays a Role in Digital Asset Loan Management
Behold the legions of borrowers that encounter difficulties applying for conventional credit.
By Tanveer Zafar •
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The blockchain and cryptocurrency industries are arguably among the most rapidly growing and innovative technologies in recent history. With their popularity on the rise, there is no doubt that new applications and use cases for these technologies will continue to emerge.
Because many borrowers encounter difficulties applying for conventional loans from centralized institutions, digital asset loan management will become an important element of this new economy.
It is, quite simply, a process that allows for the securitization of an asset to get a loan and often used to purchase property or other high-value assets. Additionally, the money is then paid back over time with interest.
One of the many benefits is that it allows these types of transactions without having a bank account. Decentralized exchanges (DEX) allows businesses to borrow against their digital assets without handing over control of them.
Related: 5 Reasons to Get Started With DeFi
Decentralized finance
DeFi is an umbrella term for blockchain-based financial applications. These include DEXs and dapps that allow users to create or trade cryptocurrencies.
The most popular applications include decentralized loan platforms. Users borrow and lend cryptocurrencies without the use of a third party. Unlike traditional loans, which are often backed by collateral, decentralized versions are secured by the blockchain. This improves their security and reduces lending risk.
The protocol employs a smart contract that creates a cryptocurrency loan. A smart contract borrows and returns the crypto token it was created with, minus applicable fees.
Lenders profit by loaning their cryptocurrencies to borrowers through token-lending protocols. When there is a high amount of demand, interest rates will rise. However, if there are too many available tokens for loans, interest rates will fall due to an overabundance.
Related: Everything You Need To Know About Cryptocurrency's Next Big Thing: Decentralized Finance
Borrowing and lending made easy
Cryptocurrencies have done away with the need for financial institutions, which not only saves consumers money but also enhances their freedom and privacy.
Additionally, crypto enable individuals to conduct transactions without the need for third-party intermediaries. This makes financial activities more efficient, safe and affordable. Investors can use them in any country and this makes them more accessible to a larger number of people worldwide.
When it comes to blockchain technology, key characteristics like decentralization, transparency and immutability make it revolutionary. These attributes are crucial for allowing digital assets to be used as collateral for a loan and include the following advantages:
Efficiency: Transactions can be completed quickly and easily without a third party.
Accessibility: Loans may be obtained by anybody in the world at any time.
Trust: Transactions are secure, transparent and immutable. Smart contracts can perform transactions without a third party.
Perhaps the most apparent plus is the growing popularity of cryptocurrencies to borrow credit. This works by taking out loans in the form of crypto instead of fiat currencies. Traditionally, this has been difficult because prices would have to increase dramatically for this to be a viable form of borrowing money.
The second alternative is to tokenize the currency being borrowed. Digital currency loans must have enough value for lenders to make a profit, or they would never agree. This includes creating a decentralized market for currencies that can be used as collateral.
It implies placing loans against all kinds of digital assets. It could also mean placing loans on other digital assets that lend themselves to value appreciation. These can include in-game items like CryptoKitties. More coins will be introduced with significant investment potential as time passes.
Cryptocurrency investors can now use platforms like DeBond protocol (which provides a platform for decentralized derivatives) to enlarge their trading resources. DeBond developed the ERC-3475 tokenized standard that enables users to turn their crypto assets into bonds.
Users will also be able to use the Metamask plugin directly on their browser, making it possible for them to access their ERC-3475 bonds without downloading any extra software or regenerating private keys. They may link their existing wallets via metamask to access their ERC-3475 bonds.
Currently, the lending industry relies on credit scores to determine what lenders should charge as interest rates to borrowers. However, this method often fails individuals simply looking to lend money to others. Platforms like Bloom plan to use social media profiles and spending habits to calculate credit scores, opening up a new range of possibilities for lenders and borrowers alike.
Decentralization is the key to digital asset loan management because it can help reduce risk by distributing loans across multiple lenders. This new form of lending makes borrowing easier than ever before.
Related: Why We Should Advocate for Decentralized Finance and Its Regulation
